Behavioral Economics: Toward a New Paradigm

This article discusses the challenges behavioral economics poses for neoclassical economics and the ways in which the young field may move forward. After reviewing some of behavioral economics ’ accomplishments and the responses to these accomplishments, the article asks whether its findings can be incorporated into the neoclassical paradigm and suggests additional steps behavioral economics may consider undertaking in order to expand its reach. Keywords behavioral economics, neoclassical economics, economics This article discusses a relatively new field, behavioral economics (B.E.), the chal-lenges it poses for the dominant economic paradigm, neoclassical economics, and the ways in which the young field may move forward. In Part I, this article briefly reviews select key accomplishments of B.E. thus far. It then turns to discuss the ways in which major scholars who ascribe to the neoclassical paradigm, when faced with the set of facts revealed, have responded. The article then turns to ask whether the findings of B.E. can be incorporated into the neoclassical paradigm or, instead, point to the need for a new one. Part II suggests additional steps B.E. may consider undertaking in order to expand its reach and provides additional data relevant to the question of whether B.E. points to a new paradigm or merely modifications of the existing, neoclassical one. A few words on the two key concepts here used: B.E. and the neoclassical para-digm. B.E. has been variously defined as: “the combination of psychology and eco-nomics that investigates what happens in markets in which some of the agents display human limitations and complications ” (Mullainathan & Thaler, 2001, p. 1); as “a field concerned with the empirical validity of neoclassical assumptions about human behavior